Introduction
Day trading is one of the most widely used trading strategies. Day traders are active in most financial markets, such as stocks, forex, commodities, and of course, cryptocurrencies. However, is cryptocurrency day trading right for you? How do day traders make money? Should you day trade?
Unfortunately, we cannot answer these questions directly, but this article will explain the necessary knowledge to participate in day trading.
What is Day Trading?
Day trading is a trading strategy that involves buying and selling within the same trading day. This strategy is also known as intraday trading, as the trades are completed within the same day. The goal of a day trader is to try to profit from the price fluctuations of a financial instrument using an intraday trading strategy.
The term "day trading" comes from the stock market, which is open only on weekdays. In order to take advantage of intraday price movements, day traders never hold their positions overnight.
How do day traders make money?
Successful day traders have a deep understanding of the market and extensive experience. They usually build trading strategies through technical analysis (TA) to identify entry and exit points based on trading volume, price trends, chart patterns and technical indicators. As with all trading strategies, risk management is the key to success in day trading.
Fundamental events take a long time to play out, so day traders don't consider fundamental analysis (FA). Even so, some day traders use "trading the news" as a basic strategy. This involves looking for high-volume assets based on recent announcements or news content, and taking advantage of temporary spikes in trading activity.
Day traders aim to profit from market fluctuations. Therefore, volume and liquidity are very important for day trading. After all, day traders need good liquidity to execute fast trades, which is especially critical when selling. A single trade with high slippage can cause a day trader's account to suffer serious losses. That is why they usually choose highly liquid markets.
Some day traders focus on just one trading pair, such as BTC/USDT, while others create a watch list from which they select trading targets based on technical or fundamental attributes (or both).
Day Trading Strategies
Ultra short-term trading
Scalping is a common strategy among day traders that involves taking advantage of small price movements that occur in short-term investments, including gaps in liquidity, bid-ask spreads, and other market inefficiencies.
Ultra-short-term traders often choose to trade on margin or futures contracts to amplify their gains through leverage. Since the price target percentage is smaller, it makes more sense to choose a larger position. In fact, this is a common situation for most day trading strategies.
However, leveraged trading requires risk management principles. Successful scalpers pay close attention to margin requirements and manage their position size appropriately according to the rules. For a simple formula to calculate position size, please read "How to calculate position size in trading"
Scalping traders can use order book analysis, volume heat maps, and a variety of technical indicators to determine the buy and sell points for each trade. However, given the fast turnover and high risk nature, scalping is more suitable for experienced traders. Extensive use of leverage also has potential risks, and a few bad trades can quickly cause a trading account to lose money.
Range Trading
Range trading is a relatively simple strategy that involves a lot of candlestick chart analysis and looking at support and resistance levels. As the name suggests, range traders look for price ranges within the market structure and then build trading strategies based on these ranges. For example, if the price fluctuates between support and resistance levels, they can buy support and sell resistance. Conversely, they can short resistance and exit at support.
Range trading is based on the assumption that range strength holds support and resistance levels until the range is broken. This means that low range strength is likely to drive prices higher, while high range strength is likely to drive prices lower.
However, the longer the price spends touching support and resistance levels, the greater the chances of a break below them. Therefore, range traders are always on the lookout for opportunities for the market to break below its range. Generally, this means setting a stop loss after a confirmed breakout of a range.
For more information on this topic, read The Fundamentals of Support and Resistance Explained.
Range trading is a relatively straightforward strategy that is suitable for beginners. Range trading is closely related to candlestick charts and support and resistance levels, and also involves momentum indicators such as the relative strength index (RSI) or the exponential moving average convergence (MACD).
High Frequency Trading (HFT)
High-frequency trading is an algorithmic trading strategy often used by quantitative traders. It requires the development of specialized algorithms and trading robots to quickly buy and sell many positions in a short period of time. How short is the time? Usually only a few milliseconds. With millisecond-level trading speeds, high-frequency trading institutions have a clear advantage over other companies or enterprises.
They build HFT algorithms and implement sophisticated trading strategies. While on the surface an attractive day trading strategy, high frequency trading is much more complex. High frequency trading involves backtesting, monitoring and frequent fine-tuning of algorithms on a large scale to respond to changing market conditions. Therefore, you cannot leave all the work to the trading robots and sit back and relax.
Another thing to note is that high-frequency trading is highly professional and has a high threshold, making it difficult for ordinary traders to obtain high-quality information. Why is this the case? The reason is quite simple. If successful trading institutions and hedge funds share high-frequency trading strategies with individual investors, these strategies will no longer work.
There is one more thing worth noting about trading robots. If someone has developed a trading robot that generates high returns, why don’t they just use it instead of selling it? Therefore, you must think twice before buying a high-frequency trading robot.
Developing HFT robots requires a deep understanding of complex market concepts and extensive knowledge in mathematics and computer science. Therefore, high-frequency trading is more suitable for experienced traders.
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How to Get Started with Day Trading Cryptocurrencies
If you want to participate in day trading, where should you start?
Read the complete guide for beginners to crypto trading for more information on essential trading and tips for retail investors. Once you have mastered the basic concepts, we recommend logging into the Binance Futures testnet to simulate trading. This way you can try out the trading system without losing real money.
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Can Day Trading Be My Living?
Day trading has the potential to generate high returns, but there are a few things you must carefully consider before participating. Day trading is demanding and requires quick decision making and execution, which puts traders under tremendous pressure. This strategy is potentially high risk and requires traders to have a deep understanding of the market. Of course, traders must watch the market for long periods of time, so there is little opportunity to slack off.
Can you take the risk of losing your money and take all the stress? You must carefully consider whether day trading fits with your personal investment goals and personality.
If you're not sure if day trading is right for you, read our Beginner's Guide to Crypto Trading Strategies. In this article, we cover a number of strategies that active traders can use, such as swing trading. Mastering these strategies will help you develop your own trading style.
Summarize
Day trading is a widely used trading strategy in the stock and cryptocurrency sectors. Day traders use intraday trading strategies to exploit profit opportunities from market fluctuations, and usually hold positions for no more than one day.
Day traders use technical analysis, chart patterns and technical indicators to identify trading opportunities. Some of the most widely used strategies include scalping, range trading and high frequency trading.
Want to learn more about day trading? Visit Ask Academy, our Q&A platform, where members of the Binance community will answer your questions.